The Glossary

Bridging the gap between professional investment analysis and everyday understanding with straightforward explanations of key terms.

Confused by financial terminology in my company analyses? This is your permanent reference guide for all the terms, ratios, and concepts that appear throughout my investment write-ups.

Bookmark this page to instantly decode any unfamiliar financial language you encounter – it will continue growing to ensure nothing stands between you and understanding the companies I cover.

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EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation)

Think of EBITDA as a company's earnings with all the accounting complexity stripped away.

It's like looking at a business in its natural habitat, before the tax experts and finance departments get involved. Companies love highlighting EBITDA because it shows operational performance without the "distractions" of capital structure or accounting methods.

Imagine two pizza shops making identical sales and spending the same on ingredients and staff. One owns its building while the other has a massive loan. EBITDA lets you compare their operational efficiency without the loan payments skewing things.

Critics often joke it stands for "Earnings Before I Tricked Dumb Auditors" because it can make struggling companies look healthier by excluding real expenses they'll eventually have to pay. EBITDA shines when comparing similar businesses with different capital structures but falls short for capital-intensive industries where those excluded depreciation costs represent genuine economic reality.

EBITA (Earnings Before Interest, Taxes, and Amortisation)

EBITA sits between EBIT and EBITDA on the earnings ladder.

It adds back amortisation charges (the gradual writing-off of intangible assets) but keeps depreciation (the expensing of physical assets). It's like saying, "Let's ignore the accounting treatment of your brand and patents, but still account for your machinery wearing out."

A software company might report £10 million in net income but £15 million in EBITA after adding back amortisation of acquired code and customer lists. Private equity firms often prefer EBITA when valuing acquisition targets with significant intangible assets but meaningful physical operations.

EBITA works well for comparing companies with different amounts of acquired intangibles but similar physical asset needs. It falls short when companies have vastly different capital expenditure requirements—adding back amortisation while keeping depreciation creates inconsistent treatment of investment costs.

EBIT (Earnings Before Interest and Taxes)

EBIT reveals a company's operational profitability before factoring in how it's financed or taxed.

It's calculated as revenue minus operating expenses, including depreciation and amortisation. Think of it as answering: "How much money does this business generate from its core operations, regardless of its capital structure or tax jurisdiction?"

Marks & Spencer might have £500 million in EBIT, showing its retail operations' profitability before considering its debt payments or UK tax obligations. EBIT shines when comparing companies with different debt levels or tax situations—it lets you focus solely on operational effectiveness.

However, it becomes less useful for capital-intensive businesses where equipment costs (reflected in depreciation) represent ongoing economic reality rather than accounting conventions. Bankers and analysts often use EBIT to calculate "interest coverage ratio" (EBIT ÷ Interest Expense), a key metric of debt sustainability, indicating how many times over a company could pay its interest obligations.

P/E Ratio (Price-to-Earnings Ratio)

The P/E ratio tells you how many years of current earnings you're paying for when buying a stock.

It's the financial equivalent of asking, "How many years would it take for this company to earn back my entire investment?" A company with a share price of £100 and earnings of £5 per share has a P/E of 20.

Netflix might trade at a P/E of 40 while Exxon trades at 10. This doesn't necessarily mean Exxon is "cheaper" – it means investors expect Netflix to grow much faster. High P/E stocks are like promising teenagers – you're paying for their potential, not their current productivity. Low P/E stocks are more like established adults – what you see is mostly what you get. P/E becomes misleading during economic turning points when earnings temporarily collapse or spike. It's also unreliable for cyclical businesses where current earnings might represent a peak or trough rather than sustainable performance.

Gross Margin

Gross margin answers a simple question: for every pound of sales, how much does a company keep after paying for the actual product?

It's calculated as (Revenue - Cost of Goods Sold) ÷ Revenue, expressed as a percentage. It's the financial equivalent of asking how much meat is left after trimming the fat.

Apple's gross margins hover around 40%, meaning that £400 of each £1,000 iPhone remains after manufacturing costs. Meanwhile, grocery stores often operate with gross margins below 30%. High gross margins give companies breathing room – money for innovation, marketing, and weathering tough times. They often signal pricing power and customer willingness to pay premium prices.

Gross margin can mislead when companies classify costs differently – one retailer might count warehouse costs in COGS while another puts them under operating expenses. It's also less relevant for service businesses where the line between "product cost" and "operating cost" blurs.

Free Cash Flow (FCF)

Free cash flow is the money a business generates after paying for operations and capital expenditures (OpEx and CapEx).

It's the cash a company can actually use – to pay dividends, buy back shares, fund expansion, or stockpile for future needs. Unlike accounting profits, which can include non-cash items, FCF represents actual cash available.

A company can report profits while having negative free cash flow. Tesla reported accounting profits for years while FCF remained negative due to massive factory investments. Net income might show £100 million in profit, but if the company spent £150 million on new equipment, FCF would be negative £50 million. Investors prize FCF because "earnings are an opinion, but cash is a fact." However, FCF can be temporarily depressed by growth investments that will pay off later. A low or negative FCF isn't always bad – Amazon famously prioritised growth over FCF for years, reinvesting available cash to build its empire.

Market Capitalisation (Market Cap)

Market capitalisation is simply the total value of all a company's outstanding shares.

Calculate it by multiplying the current share price by the number of shares. It's the price tag the market puts on the entire business.

Companies are often categorised by their market caps. Apple, Microsoft, and Google parent Alphabet are "large caps" worth hundreds of billions or trillions. "Mid caps" might be valued between £2-10 billion, while "small caps" typically fall below £2 billion. Size matters here – larger companies tend to be more stable but grow slower.

Market cap can mislead during market bubbles when investor exuberance inflates valuations beyond reasonable fundamentals. It also doesn't account for debt – a company might have a small market cap but massive obligations making its enterprise value much larger. Professional investors use market cap to assess liquidity risk and institutional buying potential.

EV/EBITDA (Enterprise Value to EBITDA)

EV/EBITDA compares a company's total value (including debt) to its operational earnings.

Enterprise Value (EV) adds debt and subtracts cash from market cap to get the true "takeover price" of a business. Think of it as the "all-in cost" to buy the entire operation.

This ratio matters because it allows for fairer comparisons between companies with different debt levels. Two identical businesses might have very different P/E ratios if one is debt-free while the other has borrowed heavily. EV/EBITDA normalises this difference. It's like comparing houses based on total cost of ownership rather than just the down payment.

This metric falls short for asset-light businesses like software companies where EBITDA excludes critical costs like stock-based compensation. Analysts typically consider lower EV/EBITDA ratios more attractive, but the definition of "low" varies tremendously by industry and growth prospects.

Operating Margin

Operating margin reveals what percentage of revenue remains as profit after paying for day-to-day business operations, but before dealing with interest expenses and taxes.

It's calculated as operating income divided by revenue. Think of it as efficiency measured in percentage points.

Microsoft's operating margins exceed 40%, meaning they keep more than 40 pence of every pound after running the business. Walmart's margins hover around 4% – they keep just 4 pence per pound. Neither is necessarily "better" – they reflect fundamentally different business models.

Operating margin loses significance when companies make large one-time investments or take restructuring charges that temporarily depress results. It also doesn't account for different growth rates – a lower-margin business growing at 50% annually might create more value than a high-margin one growing at 5%. Investors track operating margin trends to spot competitive advantages strengthening or eroding over time.

Moat

A moat is a metaphorical concept Warren Buffett popularised and it’s … well, a moat.

Just as castle moats protected medieval lords from attackers, economic moats protect companies from competition. It's any sustainable competitive advantage that preserves long-term profits and market share.

Apple's moat includes its ecosystem and brand prestige. Visa and Mastercard enjoy network effects – each new user makes their service more valuable to everyone. Some moats come from high switching costs (enterprise software), proprietary technology (pharmaceutical patents), cost advantages (Costco's scale), or regulatory barriers (utilities).

Moats can be overestimated when technological shifts create "castle-jumping" opportunities – Kodak's seemingly impenetrable film moat evaporated with digital photography. The concept also struggles with timing – identifying a moat is easier than predicting how long it will last. Professional investors seek businesses where moats are strengthening rather than merely existing.

Net Debt

Net debt equals total debt minus cash and cash equivalents.

It shows a company's true financial obligations after accounting for the money it has on hand. It's the financial equivalent of calculating your mortgage balance after considering your savings account.

Apple might have £100 billion in debt but hold £200 billion in cash, giving it negative net debt of -£100 billion. Meanwhile, a highly leveraged retailer might have £5 billion in debt but only £500 million in cash, resulting in £4.5 billion net debt.

Net debt becomes misleading when cash isn't truly available – some may be trapped in foreign subsidiaries or reserved for specific purposes. It also doesn't account for debt maturity – £1 billion due next month creates more stress than £2 billion due in ten years. Analysts use net debt alongside EBITDA to create the "Net Debt to EBITDA" ratio, a key metric of financial health. Above 3x often raises concerns about debt sustainability.

Return on Equity (ROE)

Return on Equity measures how efficiently a company generates profits from shareholders' investments.

Calculate it by dividing net income by shareholders' equity. It answers the question: "How much profit is this company generating with the money shareholders have invested?"

A company that earns £15 million on £100 million of shareholder equity has a 15% ROE. That's generally considered good. Different industries have different ROE benchmarks – technology companies often deliver higher ROEs than utilities.

ROE can be artificially inflated through financial engineering – taking on excessive debt or aggressive share buybacks reduces equity (the denominator), mathematically boosting ROE without improving operations. It also falls short for asset-light businesses with minimal balance sheet equity. Professional investors often decompose ROE using the "DuPont analysis" to understand whether improvements come from better margins, faster asset turnover, or increased leverage.

COGS (Cost of Goods Sold)

COGS represents what a company directly spends to produce the items or services it sells.

Think ingredients for a baker, wholesale inventory for a retailer, or manufacturing costs for a factory. It's the financial equivalent of your grocery bill when hosting a dinner party—the direct costs of creating what you're offering.

For Apple, COGS includes components like chips and screens, assembly costs, and packaging for each iPhone. For Netflix, it might include content licensing fees and server costs to deliver streams. COGS varies dramatically by business model—manufacturers typically have higher COGS than software companies.

This metric becomes problematic when companies inconsistently categorise expenses. Is quality control part of COGS or operating expenses? Different companies make different choices. Analysts scrutinize COGS trends to spot supply chain issues or pricing pressure from suppliers, which often appear here before affecting the bottom line.

PEG (Price/Earnings to Growth Ratio)

PEG takes the familiar P/E ratio and divides it by the company's expected earnings growth rate.

It answers whether a stock's premium valuation is justified by its growth prospects. A PEG of 1.0 traditionally suggests fair value—you're paying up for growth, but not excessively.

Amazon might trade at 40 times earnings with expected 35% growth, giving it a PEG of 1.14. Meanwhile, Tesco might trade at 12 times earnings with 3% expected growth, yielding a PEG of 4.0. Counterintuitively, despite Amazon's higher P/E, its faster growth makes it potentially "cheaper" on a PEG basis.

PEG loses reliability when growth forecasts prove wildly inaccurate or during economic transitions when growth patterns shift dramatically. It also struggles with mature companies where modest growth doesn't capture stability's value. Growth investors use PEG to identify situations where the market hasn't fully priced in a company's accelerating earnings trajectory.

Forward Earnings

Forward earnings represent analysts' collective predictions about a company's future profits, typically for the next fiscal year.

While trailing P/E uses past results, forward P/E uses these projections. It's financial fortune-telling with spreadsheets—an educated guess about tomorrow's profits.

BP might currently earn £1 per share, but analysts forecast £1.20 next year due to new projects coming online. With shares at £24, that's a trailing P/E of 24 but a forward P/E of 20. Forward earnings prove valuable during recovery periods when past results reflect temporary problems. They're particularly useful for seasonal businesses where current quarterly earnings might not represent annual performance.

Forward estimates become dangerous during economic turning points when analyst consensus hasn't caught up to changing conditions. The financial crisis saw forward earnings remaining optimistic long after conditions deteriorated. Sophisticated investors track estimate revisions—the direction analysts are moving their forecasts—rather than just the estimates themselves.

Operating Profit

Operating profit measures a company's earnings from its core business activities before interest and taxes.

It's revenue minus all operating expenses, including COGS, salaries, rent, marketing, and depreciation. It answers: "How much did the business earn from its actual operations?"

Sainsbury's might report £10 billion in revenue and £400 million in operating profit, indicating they keep 4% of sales after running the business but before paying bondholders and the taxman. Operating profit provides a cleaner view of business performance than net income, which includes financial engineering effects.

However, it can be manipulated through aggressive capitalisation policies that shift current expenses to the balance sheet as assets. Executives focus intensely on this number since it reflects the business aspects they directly control, unlike interest costs (set by lenders and markets) or tax expenses (determined by governments).

OpEx (Operating Expenses)

OPEX encompasses all the day-to-day costs of running a business beyond direct product costs.

It includes salaries, rent, utilities, marketing, research, and administrative expenses. Think of it as everything you spend money on besides making your actual product.

A software company might have minimal COGS (just server costs to deliver its app) but substantial OPEX in the form of developer salaries, office space, and marketing campaigns. OPEX matters because it reveals a company's operational efficiency and overhead burden. Rising OPEX without corresponding revenue growth signals declining efficiency or problematic investments.

OPEX becomes misleading when companies inconsistently categorise expenses or when temporary costs (like rebranding campaigns) distort trends. Cost-conscious investors closely monitor "OPEX as a percentage of revenue," expecting this ratio to decline as companies scale—a phenomenon called operating leverage.

CapEx (Capital Expenditures)

CAPEX represents money spent on physical assets that will provide value over many years—new factories, equipment upgrades, store expansions, or technology infrastructure.

It's the corporate equivalent of renovating your kitchen rather than buying groceries. Unlike OPEX, these costs are capitalised (recorded as assets) and depreciated over time.

BT might spend £5 billion on CAPEX to upgrade its fibre broadband network, while Tesco spends £1 billion renovating stores and building distribution centres. CAPEX signals confidence in future growth—companies make these long-term investments when they expect returns for years to come. However, high CAPEX can indicate either healthy investment in growth or desperate attempts to maintain outdated business models. Context matters enormously. Analysts often use the "CAPEX to Depreciation ratio" to assess whether a company is investing enough to maintain its competitive position—ratios below 1.0 suggest underinvestment that may eventually harm the business.

Adjusted Earnings

Adjusted earnings represent what a company claims its "true" profitability would be after removing supposedly one-time or non-core items.

Common adjustments include restructuring costs, acquisition expenses, asset write-downs, or stock-based compensation. It's the financial equivalent of saying, "Here's what we'd have earned if all those unusual things hadn't happened."

WeWork famously created "community-adjusted EBITDA" that excluded basic operating costs like marketing and administration, transforming losses into paper profits. More legitimately, Unilever might report adjusted earnings that exclude costs from combining recently acquired brands into their operations.

Adjustments can provide insight when they truly reflect non-recurring events. They become problematic when the same items get adjusted away quarter after quarter—suggesting they're actually recurring costs of doing business. Warren Buffett famously advised investors to be skeptical: "If compensation isn't an expense, what is it? And if it's an expense, why isn't it in the calculation of earnings?"

Operating Leverage

Operating leverage measures how much a company's profits change in response to changes in revenue.

It stems from the relationship between fixed and variable costs. High fixed costs create high operating leverage—a small increase in sales can dramatically boost profits once those fixed costs are covered.

An airline with expensive planes, airport gates, and staff has high operating leverage. A 10% increase in passengers might increase profits by 30% because most costs don't change with additional bookings. Meanwhile, a consulting firm with mostly variable costs (consultant salaries tied to billable hours) might see profits rise only 12% with the same 10% revenue increase. Operating leverage works in reverse too—companies with high fixed costs see profits plummet faster when revenue falls. This concept explains why seemingly small revenue misses can trigger dramatic profit warnings. Investors prize businesses that can increase operating leverage over time, installing cost structures that don't grow as quickly as revenue.

Bull

A bull is an investor who believes prices will rise, be it for a specific stock, sector, or the market overall. The term originates from how bulls attack—thrusting their horns upward. It's financial slang for optimism, confidence, and upward momentum.

A typical bull might say, "Despite recent volatility, strong earnings and consumer spending point to another 15% upside for the S&P 500 this year." Bull markets are characterised by prolonged periods of rising prices—historically averaging 97% gains over 4.4 years. During these periods, investors tend to buy dips, take on more risk, and focus on growth rather than value.

Being bullish doesn't necessarily mean blind optimism. Sophisticated bulls often acknowledge risks but believe positive factors outweigh negatives. The term can mislead when applied too broadly—someone might be bullish on technology while bearish on traditional retail. Market psychology often amplifies bullish sentiment, creating feedback loops where rising prices attract more bulls, driving prices even higher until fundamentals no longer justify valuations.

Bear

A bear is an investor who expects prices to fall in a particular security, industry, or entire market. Named after the downward swiping motion bears make with their paws when attacking, bears anticipate (and sometimes profit from) declining asset values.

During the 2008 financial crisis, bears like Michael Burry and John Paulson earned billions by betting against mortgage-backed securities while most remained optimistic. Bear markets—defined as 20%+ declines from recent peaks—tend to be shorter but more intense than bull markets, averaging 46% declines over 15 months. Bears point to excessive valuations, deteriorating fundamentals, or macro risks others might overlook or dismiss.

Being bearish can be psychologically difficult as markets rise more often than they fall, making bears appear pessimistic during extended uptrends. However, bearish perspectives serve crucial market functions—they temper excessive optimism, identify genuine risks, and create liquidity when markets need sellers. Even the most successful long-term investors often adopt temporary bearish positions to protect capital during anticipated downturns.

to be continued